What is Mixed Banking?

Mixed banking is an approach where banks undertake both commercial and industrial banking and is a popular banking model in countries like Germany and Japan. German banks present a typical case of banking where they undertake multiple functions and are thus referred to as ‘Universal Banks’.

The development of mixed banking model in Germany is based on the fact that there was no proper financial institution in Germany which could support the development and proliferation of its industry. Trade and commerce were also in nascent stages. Thus, both the governments and banks felt the need to provide sufficient funds for long-term was essential for speedy industrialisation. Hence, instead of just short-term lending for trade and commerce, the banks started to advance long-term loans and subscribed to the shares or debentures of the young companies. This also gave a requisite push to the stock exchange due to the marketability of shares of these joint stock companies.  In India, the recommendations of the Shroff Committee in 1954 suggested that Indian banks too can support industrial finance.

Key Features of Mixed Banking

Mixed banking basically stands for a combination of two pure banking models like commercial banking and investment banking in different proportions. Although it was banned in US for a large part of 20th Century under Glass-Steagall Act, due to an abstract conflict of interest with traditional modes of banking, the system remained in place in rest of the world.

Further on, relaxing of restrictions on traditional banking, investment banking, asset management, insurance etc. gave the desired boost to universal banking models.

The Basel Committee on Banking Supervision classified 20 out of 28 G-SIB  (Global Systemically Important Banks) as Universal Banks. Thus, this system provides a one-roof solution to industries for short-term finance to meet needs like purchase of raw-materials, wages etc. and also for long-term finance for purchase of plant and machinery. It helps commercial banks to raise enough funds to provide substantial aid to various firms. The banks gauge the soundness of industrial units by security evaluation.

They guide and advice the industrial units on covering their financial needs by selling of shares, stocks and debentures. This helps in stimulating capital formation in the country and thereby promotes industrialisation. On the other hand, it reduces the liquidity at the hands of banks as a major part of their funds are parked in long-term finance. Such banks are not able to withstand sharp economic downturns especially when the securities of companies suffer a major loss in value.

Many German banks suffered a major fall in 1929 Great Depression as many industries to which they had lent experienced a fall in prices and profits. The lesser amount of liquid money at disposal further may come in conflict with the pure structure of banking.


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